RE: The Definition of a Social Insurance Scheme and its Classification as Defined Benefit or Defined Contribution

Posted By:

John Pitzer on 6/30/2003 1:23:28 PM

This paper comments on an interview posted on this electronic discussion group on pensions (April 3, 2003), where Anne Harrison discusses the distinction between a social insurance scheme with a savings component and a pure saving scheme (section 1 of the interview) and the distinction between defined-contribution and defined-benefit pension schemes (section 2). Her comments raise questions about what characteristics are required for a scheme to be a social insurance scheme. The definitions of social insurance schemes in System of National Accounts 1993 (1993 SNA), Government Finance Statistics Manual 2001 (GFSM 2001), and European System of Accounts 1995 are similar but not identical. All of the definitions are intended, however, to represent the same concept. A unified definition applicable in all macroeconomic statistical manuals should be developed so that they are consistently classified and because social insurance schemes are treated differently than pure saving schemes.

Pension schemes can be described as either defined-contribution or defined-benefit schemes. This distinction does not affect the recording of any transactions in the 1993 SNA but has consequences for the valuation of liabilities of pension schemes and the corresponding assets of households. The liability associated with defined-contribution schemes is the value of the assets of the scheme. There is not a direct link between the assets and liabilities of a defined-benefit scheme. The liability associated with defined-benefit schemes is the present value of the benefits promised by the scheme, the estimation of which can be complex and require the assistance of actuaries.

Social insurance schemes should be defined in all manuals as collectively organized insurance schemes in which employees and/or others are obliged or encouraged to spread risk by taking out insurance against certain social risks. Such schemes require contributions, actual or imputed, to secure entitlement to social benefits. A scheme is collective if participants either do not take out individual policies or one of the three conditions in paragraph 13 applies. In the formal statement of this definition in a manual, the three conditions regarding individual policies would, of course, have to be enumerated in detail.

The primary differences between the social and other insurance are: (a) social insurance schemes involve a group of policyholders acting collectively, but other insurance involves policyholders acting individually; (b) social insurance pays only social benefits related to the type of social risks specified in SNA 8.56, but other insurance can pay claims with regard to many other kinds of risk; and (c) participation in social insurance is obligatory or encouraged, but participation in other insurance is by the free will of the individual policyholder.

A saving scheme that does not spread risk is not an insurance scheme. No insurance risk is involved with defined-contribution schemes. Defined-contribution schemes are saving schemes; they should not be classified as social insurance or other insurance.

If the 1993 SNA is revised to recognize liabilities with respect to unfunded pension schemes, then defined-contribution schemes could be unfunded. Until then, a pension scheme can be a defined-contribution scheme only if it is funded. GFSM 2001 already recognizes these liabilities.

John Pitzer worked with the IMF and is now a consultant. He was the primary author of the GFSM 2001.

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